A recent report sponsored by the Investment Association said that the IA is strongly in favour of wider employee share ownership. But is now a good time to adopt a new employee share plan?
A recent report, published by The Social Market Foundation (“the SMF”), in February 2020 was entitled “Strengthening employee share ownership in the UK”. This report was both supported and funded by the Investment Association.
The SMF is an independent British political public policy think-tank based in Westminster, London. It is allegedly one of the ‘Top 12 Think Tanks in Britain’.
The Report is a lengthy tome and it assesses the potential for employee share ownership to reduce inequality, tackle the UK’s supposed productivity problems, improve financial resilience and increase the employees’ voice within companies.
There is, says the report, a growing amount of evidence that employee ownership enhances long-term performance within companies, it improves employee commitment and it helps staff retention. A poll of workers in larger companies found that 68 per cent liked the idea of holding shares in the companies they worked for, while 58 per cent agreed that it would make them more motivated.
Britain’s institutional investors are seemingly warming to the idea that companies should be set targets to increase employee share ownership.
The SMF has urged the government to set a target for large listed companies. This could either be a percentage of share capital owned by staff or a percentage of the workforce owning shares. A target of 10 per cent of the company owned by staff “might capture the public imagination”, it said.
There needed to be “a sea change in attitudes to employee ownership”, the SMF has said, including giving employee shareholders a bigger say than outside shareholders in running the company.
Whilst the IA said it was strongly in favour of employee ownership it declined (sensibly) to comment on the 10 per cent target proposed.
For our part, we do strongly support wider employee share ownership in many listed companies and even in some privately owned ones. However, we do not advocate any sort of league table, nor the need to have any sort of target for large listed companies. We certainly do not favour employee shareholders having a bigger say than outside shareholders in how a company should be run.
Companies in the UK have a wide choice of tax-approved employee share plans that they may consider adopting. These include Savings Related Share Option Schemes (“Sharesave” or “SAYE” Schemes), Share Incentive Plans (or “SIPs”), Company Share Option Plans (or “CSOPs”) and Enterprise Management Incentives (or “EMIs”) for smaller companies.
It seems a shame, therefore, that so few companies in the UK have any sort of wider share ownership plan to provide their employees with an opportunity to acquire shares in their employing company. The statistics suggest that just over 13,000 out of 1.4 million firms operate tax-advantaged employee share ownership plans. The SMF estimates that just 1.9 million workers have a stake in the business they work for and about 10 per cent of employees in companies with more than 500 workers have some shares.
One of the big dangers associated with employee share plans is the risk that employees may become disincentivised if the value of their shares goes down. It is important in this connection to educate employees on the financial risk to them of investing in shares and in particular of potentially having all their eggs in the one basket.
As far as the employing company is concerned, it will need to understand the various different types of employee share plan that are available to them to implement and decide which type of plan is right for them and their workforce. Most of the tax-advantaged plans that are available are option based plans and, to that extent, while the employee is holding options, they are not benefitting from any dividends that are being declared on the company’s shares.
Having said that, employees often prefer the option-based plan structure because they feel protected, while holding options, from a fall in the company’s share price.
One might argue that putting in a new employee-wide share scheme just after there has been significant turmoil in financial markets is not the best time to do so, as employees will be worried about the concept of investing in shares generally and the reliability of their employer’s shares in particular. We would argue, on the other hand, that now would be a very good time to consider putting in a new employee share plan. To some extent one may be able to communicate that a lower share price provides a potentially attractive buying opportunity, although of course employers must be careful not to be seen to be providing any sort of financial advice.
Education and communication will be key. If communicated well, a new employee share plan should be seen as an attractive perk to employees, particularly those who are invited to participate for the first time. It can also be communicated (and structured) in a way of expressing a sort of thank you and appreciation to employees for bearing with and continuing to work hard for the company through difficult times.
MM&K is very well experienced at advising companies on the different types of employee wide plans that are available in the UK market as well as on a more global basis. We would be pleased to have an initial discussion with any of our clients about the pros and cons of putting in an employee wide share plan, and the various different types of plan that are typically being used, on a completely non-committal basis.